The NASDAQ hits a new all-time high

Market analysis
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12/30/2016

In a short week with most markets closed on December 26, trading was as usual light. European equities were little changed.

European equities were little changed. In the US, the Nasdaq hits a new all-time high while the Dow Jones failed to clear the 20,000 mark. Japanese equities fell sharply on Thursday, adding to US equity fallbacks, on news of accounting problems at Toshiba. Rising oil prices helped emerging country equities rebound at the end of the period.

US economic indicators on consumer confidence and activity continued to come in better than forecast. There was scant news in Europe apart from France’s improving jobs markets and a recovery in Italian consumer confidence. After the steep rise in sovereign bond yields that kicked off in September, yields continued to fall back, a trend that started in mid-December. Yields on the 10-year German Bund, for example, fell back below 0.20%, close to levels seen at the beginning of November.

We remain buyers of European equities: the latest ECB meeting provided better visibility on future monetary policy and companies will probably benefit from an improvement in nominal growth. In the US, the expected downturn in company margins has been put back somewhat due to a reform pipeline, especially fiscal measures. As a result, investing in primarily US domestic stocks looks interesting. In fixed income, we prefer corporate and financial bonds. And given rises in government bond yields, we are neutral on duration in the US but slightly positive on the eurozone thanks to support from the ECB.

European equities

European markets had a muted year-end amid thin trading. Commodities and energy remained on form as the oil price moved higher again over the week. Banks and autos remained weak as long bond yields continued to slip back. In company news, Banca Monte dei Paschi di Siena failed to find the EUR 5bn for its recapitalisation and had to appeal to the Italian government. Airbus signed a USD 18/19bn contract with Iran for 100 planes (A320, A330 and A350). At the same time, it delayed delivery of 12 A380 planes, mostly meant for the UAE, due to engine problems. The incident does not represent a significantly negative impact for the group.

Total reinforced exposure to Brazil by signing an agreement with Petrobras which will give the French major access to 2 Brazilian oil fields and other assets. Nokia is involved in a dispute with Apple over non-payment of patent royalties. M&A deals and stakebuilding continued to provide strong support. NN Group is to buy Delta Lloyd for EUR 2.5bn. Vivendi continued to buy Mediaset shares and now has 28.8% of the group (29.9% of voting rights). Air France finalised the sale of 49.99% of Servair to Gate Group as part of its ongoing move to refocus on core businesses.

We are expecting to see a deal between Actelion and Johnson & Johnson who are in exclusive talks over a “strategic transaction”. No further details were available.

US equities

In a quiet week on US markets, the S&P edged lower in thin trading. The University of Michigan Consumer Sentiment Index came in at 98.2 in December, its highest level since January 2004. The rise was primarily due to President-elect Donald Trump’s fiscally advantageous measures which it is hoped will lead to numerous job creations in the US despite uncertainty over the new administration’s approach to international trade relations. Elsewhere, manufacturing benefited from rising orders and deliveries. The Dallas Fed Manufacturing Activity Index, for example, gained 5.3 points MoM. But pending home sales fell 2.5%, no doubt due to yields on US 30-year Treasuries averaging 4.3% compared to 3.59% before the elections. The US economy is still robust and set to improve further.

The Federal Trade Commission gave its green light to Abbott Laboratories’ USD 25bn acquisition of St Jude Medical. The deal will help Abbott compete with other pharma companies like Medtronic and Boston Scientific. Qualcomm has reinforced its presence in China by signing a partnership with Gionee Communication to develop new 3G WCDMA, CDMA2000 and 4G LTE technologies.

In a flat market, utilities and real estate rose while financials, energy and industrials underperformed the S&P (-0.64%).

Japanese equities

Japanese stocks dipped after climbing to a year high during the week. Bulls paused for breath as the TOPIX edged 1.6% lower over the week. Investors proved cautious ahead of long New Year holidays in Japan, and a sharp fall in Toshiba which had a negative impact on sentiment. However, there were some good macro-economic signs from November retail sales and industrial production which continued to rise on a recovery in exports. Precision Instruments and Other Products gained around 1.1%, while Rubber Products shed 3.8%.

Nintendo, which makes the Super Mario series and Pokémon GO video games, gained 3.4% after announcing a plan to release three smartphone games in 2017.

Toshiba dived as much as 42% on reports of a possible impairment of around JPY 500bn (USD 4.3bn) at Westinghouse Electric, its US nuclear power subsidiary.

Emerging markets

This week, emerging market stocks continued to recover, supported by global equity gains and rising commodity prices. Commodities were pushed up by signs of stronger global growth, with copper up around 20% and iron ore up by 170% in 2016.

In China, year-on-year industrial profit growth continued to improve, jumping by 4.7% to 14.5% in November. As a result, year-to-date earnings growth rose by 0.8% to 9.4%. The improvement was mainly due to rising prices -PPI inflation jumped sharply to 3.3%- and to a low base given consistently negative profit growth throughout the whole of 2015.

The Brazilian President, Michel Temer, announced a package of measures to help boost the economy. These include strengthening collective-bargaining laws, allowing workers early access to their severance funds and lowering interest rates on credit cards.

Commodities

Oil prices rose further in the second half of December. Brent crude traded above USD 55 to hit a year high ahead of OPEC's reduction programme which is due to come into force on January 1st. Oil prices rallied sharply over 2016 (+55% for Brent), due to cuts to US output in the first half and the historic agreement between OPEC and non-OPEC countries in the second half. We expect prices to trade between USD 50 and 60 in the first months of 2017 pending the first reports from agencies on actual production levels. For prices to break above USD 60, investors will need to see hard data that signatories to the production cuts are complying with it. According to Libya’s national oil company (NOC), production hit 625,000 b/d (+45,000 b/d compared to the previous communique) and should continue to grow (+270,000 b/d) as production resumes at the El Sharara & El Feel sites.

December’s oil rig count in the US added 49 to reach a total of 523. This is the biggest monthly progression since March 2014. Activity is expected to continue rising, mainly in the Permian field which has the lowest cost ratios. US oil output slipped over the second half of December to 8.8 million b/d according to the Department of Energy, taking the full year drop to 5%. Chinese oil production fell by a further 9% in November, taking the YTD fall to 300,000 b/d (-7%). This is tantamount to the cuts promised by Russia in the OPEC/non-OPEC agreement.

The Christmas period saw industrial metal prices fall (with the exception of iron ore). Nickel and zinc lost more than 7% and 4% respectively although aluminium, zinc and tin inventories were down to historically low levels.

Precious metals rose as the US dollar fell back. Gold moved back above USD 1,150/oz. Central banks bought 33 tonnes of gold in November according to IMF data. Russia was the biggest buyer (32 tonnes). For 2016 as a whole, net buying came to 220 tonnes with Russia’s central bank adding 200 tonnes and China 80 tonnes while Venezuela appeared to have reduced by 84 tonnes.

Corporate debt

Credit

Credit markets ended 2016 on fine form with the Xover at 290 and the Main at 72 as attention focused on European bank news. The failure of the private recapitalisation of Monte Paschi was made official by the Italian government which opted for a precautionary recapitalisation along with emergency liquidity guarantees. This will involve some loss-sharing among creditors but individual investors will be provided with some compensation. The plan still has to be approved by the ECB, which increased the bank’s capital shortfall from EUR 5.5bn to 8.8bn, and by the competition commissioner with responsibility for overseeing government aid programmes. Some uncertainties still need to be ironed out but we are no doubt close to a credible solution for Italy’s banking sector.

In other news, Deutsche Bank and Credit Suisse reached an agreement with the US Department of Justice over residential mortgage-backed securities. For DB, the fine is half the USD 14bn originally mooted and the actual cash outlay is much less than feared. As a result, DB’s systemic risk has been sharply reduced, and even before the end of 2016.

Convertibles

Convertible bonds wrapped up 2016 with strong performance in December, capturing more than half of the rise in equity markets. In oil & gas industry news, ENI announced concession pacts for two explorations blocks in Egypt. Intercept Pharmaceuticals rose 5% on the week on the back of speculation that Novartis might be interested in the biotech company. Inmarsat stock rose as Eurowings selected its Global Xpress for Aviation in-flight broadband. Nyrstar continued its run in the last two weeks with the announcement of the sale of the El Mochito and Coricancha mines, allowing the company to minimize cash burn and continue its deleveraging plan.